If you establish a democracy, you must in due
time reap the fruits of a democracy. You will in due season have great
impatience of public burdens, combined in due season with great increase of
public expenditure. You will in due season have wars entered into from passion
and not from reason…

– Benjamin Disraeli, prime minister of England, novelist

In any bureaucracy, the people devoted to the
benefit of the bureaucracy itself always get in control, and those dedicated to
the goals the bureaucracy is supposed to accomplish have less and less
influence, and sometimes are eliminated entirely.... In any bureaucratic
organization there will be two kinds of people: those who work to further the
actual goals of the organization, and those who work for the organization
itself. Examples in education would be teachers who work and sacrifice to teach
children, vs. union representatives who work to protect any teacher including
the most incompetent. The Iron Law states that in all cases, the second type of
person will always gain control of the organization, and will always write the
rules under which the organization functions. [Pournelle's law of Bureaucracy]

This letter will be the first of a series in which I outline my
vision for the next 5–10–15–20 years of global economics. I understand that
there is a substantial amount of hubris involved in such an undertaking, so I
will approach the topic gingerly.

Why even risk such prognosticating? As longtime readers know, I am
actually writing a book on what I think the next 20 years will look like,
technologically, geopolitically, sociologically, and economically. The book is
called The Age of
Transformation. The basic thesis is that we are going to see more
change in the next 20 years than we’ve seen over the past century. Consider how
much different the world will be if a century’s worth of change is compressed
into the next 20 years.

If you do not resolve to adapt to that level of change in your
life and in the lives of your loved ones, you will not be ready to fully
participate in the society of 2038. You’ll also fail to reap the full rewards
of all the years of hard work and dedication you have put in, preparing for
your retirement.

This series on the future of the global economy will shape my
outline for the last 25% of the book. The book will expand greatly on this
series. I feel comfortable opening up my thought process to you, and I welcome
the feedback I’m going to get, because it will only improve the book.
Thoughtful comments from friends are always welcome.

The first 40–50% of the book will focus on the technological and
biological transformations that will happen in the next 20 years. In general,
that is the rainbows and puppies section of the book. There are any number of
books out there that deal with this broad topic in different ways, but nearly
all of them have a somewhat techno-utopian slant. And for good reason. Living
longer and healthier in a world of greater abundance, where the things we want
cost less? What’s not to like?

The next 25–30% of the book will deal with the
geopolitical/sociological/demographic changes that will inexorably force
themselves on us in conjunction with this technological revolution. Some of
those changes will be a reaction to the very technological forces that are
driving the change. This section will conclude with the most difficult chapter
of the book, the one that I have wrestled with the longest over the last two years,
the chapter on the future of work. For some of us that will be quite a bright
future; for others who are unable to adapt, not so much. Globally, hundreds of
millions of jobs that are currently filled by humans will simply not require
humans in the future. We will have to move on to other occupations.

This level of labor transformation is nothing that we haven’t done
in the past. Many of you will recall that 80% of Americans toiled on farms in
1800. Today that number is less than 2%, who produce massively more per capita
in much better conditions. But that change played out over more than 10 full
generations. The changes I am talking about are going to happen in less than
one generation. The transformation of employment will be one of the most difficult
social and political problems that societies all over the developed world will
face. It’s not just that there won’t be jobs, but that many of the new jobs
will require different sets of skills and be in a different locations from
where many of us live today. And while our ancestors may have set out boldly
from other corners of the world to give America a try, never to see their
home-countries and loved ones again, that propensity for relocation seems to
have diminished in present-day culture. How many Americans relish the notion of
moving from region to region anymore?

The last section of the book will deal with the future of the
global economy. And there we have some issues, as my kids would say. I don’t
think we end up in some techno-dystopian, cyberpunk Blade Runner-type world,
but the tools we use to measure the economy and the things we are measuring are
going to experience a great deal of volatility. Depending on which side of the
volatility you find yourself on, it may be either extraordinarily beneficial or
harmful. The purpose of my book will be to help you see the general direction
and power of the unfolding transformations, so that you can adapt your
strategies for the benefit of your family, friends, and businesses.

The massive amount of research that I’ve had to work through has
forced me to change my opinions more than a few times as I’ve waded through
material and prepared to put words on the screen. I’m deeply grateful to the
120 volunteer researchers who gave me literally tens of thousands of pages of
material to read and sort through on an extraordinarily wide variety of topics.

I am ultimately optimistic, and the book itself will be optimistic
about the future, but there are difficulties that we as a society will face. We
will have to devise different, and in some cases heretical, ways of operating
in order to bring the benefits of transformation to as many people as possible
in our global society. Make no mistake, political turmoil lies ahead. The
current dysfunction in Washington will seem almost quaint, by comparison, as
the country and the world lurch from one vision of the future to the next.

Just Get the Direction Right

In trying to predict the future, I feel like a Daniel Boone sort
of explorer, leading a band of compatriots through the wilderness; and we come
to the top of a new pass and peer into the distance. Way off, 50 miles away,
there appears to be another pass in the direction we want to go. The problem is
that, between here and there lie more mountains, valleys, rivers, and potentially
hostile natives. It’s not clear how we get there from where we’re standing. So
our intrepid team plunges on, trusting that our instincts and skills will take
us to that far-off pass, and then to the next one beyond that.

Now we’ve just reached the top of that pass, and we’re peering far
into the blue distance. I’m just trying to get the direction right. The actual
path we’ll take is still a great unknown.

With that thought in mind, let’s survey the main forces that will
drive the future of the economy, and in the coming weeks we will dive more
deeply into each of those forces. What we learn will serve as the backbone for
the final section of the book, which I will write in the coming weeks.

Right up front, I’m going to utter the four most dangerous words
in economics: This time is
different. Oh, I admit a lot of things will be the same, but anyone
who expects the future to look like the past is in for a rude awakening.

There are three main economic forces that are imposing themselves
upon the world, whether we like it or not. Two of them are the largest bubbles
in the history of man.

1. The bubble of global debt
2. The bubble of government promises
3. The shifting of the supply curve

I know longtime readers will be familiar with the first two, but
the last one is going to have a few of you scratching your heads. Let’s take up
each briefly.

There is considerable debate over the exact amount of global debt.
You first have to find it, and parts of it get hidden in many out-of-the-way
pockets. But broadly speaking, global debt is about 325% of GDP, and likely
over $225 trillion as I write. (I am assuming that over the last nine months
debt grew at roughly the same rate as in the preceding nine months, even though
we know the growth of debt has been accelerating.)

This
chart from McKinsey is almost three years old, but it does show the growth
of debt over time, and we know that global debt has grown by about $26 trillion
in the last two years.

The above chart requires a few observations. First, notice that
the growth of household and financial debt has decelerated. Corporate debt
continues to grow at roughly the same pace as before. The real acceleration of
growth in debt is coming from government borrowing. Second, we are on a pace to
grow the debt by significantly more between 2014 and 2021 than we did in the
previous seven years. Last, global debt is growing faster than global GDP. We
are borrowing money faster than we are creating wealth.

US government debt is about 100% of GDP, or $20 trillion, and
growing around $1 trillion a year. Forget what they say when they talk about
budget deficits. They lie, because they don’t want to admit what the true
deficit is. However, you can determine the true deficit simply by looking at
the amount of money the Treasury has borrowed at the end of the year and see
that another $400–$500 billion of “off-budget” debt has been added. If I ran my
regulated investment businesses with the same sort of spurious accounting, the
SEC and a raft of other agencies would shut me down faster than you can say
“MD&A” and ban me forever from participating in the financial industry. As
they should. You simply cannot lie when you have a public trust. Well, you
can’t unless you are Congress and the government. Then you can pass laws that
allow you to lie. But I digress.

To be able to compare our debt to that of other countries, we have
to include state and local debt, which is another $3 trillion. That means total
US government debt is 115% of GDP. That is certainly less than the 250% of
debt-to-GDP that Japan finds itself saddled with, but Japan does offer us a
clue as to how we are going to have to deal with our burgeoning government debt
in the future. If you had told me 10 years ago that Japan could essentially
monetize well over 100% of their GDP and not have their currency fall through
the floor, I would have laughed at you. (I know, I know, monetize is not the correct
technical term, as the Bank of Japan is simply buying the Japanese debt and
putting it on its balance sheet.) Since the yen didn’t collapse, we start
having to look for other causes and effects. We will get into that in later
letters.

When the next recession blows in, it will likely balloon the US
government deficit up to $2 trillion a year. The Obama administration took
eight years to run up a $10 trillion debt after the 2008 recession. It might
take just five years after the next recession to amass the next $10 trillion.
Here is a chart my staff created in late 2016, using Congressional Budget
Office data, that shows what will happen if the next recession comes in 2018
and revenues drop by the same percentage as they did in the last recession
(without even counting likely higher expenditures next time). And on top of the
$1.3 trillion deficit that this chart predicts, you can add the more than $500
billion in off-budget debt that I mentioned above, plus higher interest rate
expense as rates rise. I will update this chart for the book and later letters,
but it gets the general direction right.

By the early to mid 2020s, barring substantial increases in taxes
or reductions in government benefits and entitlements, the deficit will be
approaching $2 trillion annually. There will be weeping and wailing and gnashing
of teeth.

If you are in the top 25% of income earners in the United States,
you have a big target painted on your income and wealth. The imposition of a
VAT seems almost guaranteed, as that is the only real way to boost revenues to
offset the increases in entitlement spending. And because the Republicans don’t
want to impose a VAT now as part of major tax reform, it will end up being
imposed by a future Democratic administration and congressional majority that
will not be interested in reducing income taxes. I cannot believe the
shortsightedness of the Republican Party leadership, with their futile belief
that somehow or another they are going to develop a “pure” Republican majority
that will look like the current conservative bloc. Their intransigence is the
main reason that things can’t happen in DC. You can simply look at the
demographic trends and political forces at play and understand that they’re not
going to budge on a VAT. Sigh.

We will go into the debt bubble in greater detail, but it is the next
bubble that will drive macroeconomic change in the US.

The Bubble of Government
Promises

The US government balance sheet features unfunded liabilities in
the range of $80 trillion to $200 trillion, stemming from future entitlement
program burdens that are, in effect, government promises of future largess. No
constituency is going to vote to reduce their entitlements. (Well, other than
the very well–off, who don’t actually need those entitlements.)

Unfunded pension liabilities at the state and local levels have
swollen to roughly $4–$6 trillion in the United States. And that may be
understating the severity of the problem.

It’s easy to cite Illinois or New Jersey, but let’s look at a
state like Kentucky. The State of Kentucky released a remarkably candid
self-appraisal of their pension liability issues earlier this year. The
report makes for very sobering reading if you are a resident of Kentucky.
If you optimistically (and unrealistically) assume between 6.75%–7.5%
compounded returns for the future, Kentucky still ends up $33 billion
underfunded. To bring that number into focus, total State of Kentucky spending
last year was $32.7 billion, which makes the underfunded portion of their
pension liability larger than the entire state budget. But wait, it gets worse.

They asked themselves, what if we have to assume a more realistic
discount rate for future returns? Assuming returns just north of 5%, the
unfunded portion rises to $42 billion. Assuming a more realistic 4% (given the
likely returns on their fixed-income portfolios), unfunded liabilities rise to
$64 billion, roughly twice the state budget. If you assume a discount rate
equal to the 30-year Treasury rate of 2.7%, the unfunded liability climbs to $84
billion – seven times more than the annual general fund spending would allow.

Now, this is all before we take into account a potential
recession, which has in the past meant an average 40% loss on stock market
equities, which would make Kentucky’s (and everyone else’s) pension woes even
worse. Further, as we shall see in future letters, the massive increases in
debt, both in the US and globally, will make the next recovery and future
growth even more laggardly than the tepid recovery we have experienced in the
past decade.

The next financial crisis will not look anything like the last
financial crisis did. But it will rhyme. This next chart depicts an extreme
example of what is happening around the world. Scary levels of junk-bond debt
with covenant-lite options – coupled with the Frank Dodd rules that don’t allow
banks to operate in the corporate bond market as market makers – are going to
mean that corporate debt, from the worst right on up to the best, will take a
massive yield hit, as the flight for cash rhymes with what we saw in 2009.

Remember, in a crisis you don’t sell what you want to sell; you
sell what you can sell.

And at a bargain-basement price. We have monster mutual
funds and ETFs investing in these high-yield corporate markets, and the
redemptions from them are going to force selling into a market where there are
no buyers. If you’re wondering what will push the country into recession, look
to the financial markets. That’s where the excesses are being created. And for
the record, I could spend another four pages showing charts like the one above.

It’s All About Supply, Not
Demand

Neo-Keynesian economists in the government and at the Fed have
been doing everything they can to stimulate demand in terms of dollars spent,
believing that they will stimulate a recovery. They are missing part of the
equation. Let’s go back to economics 101 and look at possibly the first graph
you ever saw in that class: the classic supply and demand equilibrium price
graph.

If you push the supply curve to the right, i.e., you provide more
of a particular good, then the price of that good is going to go down to find a
new equilibrium.

I was talking with an economist yesterday who has John Deere as a
client. As he was touring their factory, they pointed that they were making the
same parts for 40% less today than they did just a few years ago. Improved
quality and lower prices.

Everybody latches onto the fact that real wages haven’t risen all
that much in 40 years. Well, if you look just at the standard economic numbers,
that is true. But compare what you could get 40 years ago to what you can buy
today (assuming equivalent purchasing power). Do you think TV quality was
anywhere close to today’s? Telecommunications? Automobiles? Almost everything
is far better today, more abundant, and less expensive than it was in 1977. The
same amount of money today buys a far more desirable basket of goods.

Not to mention that some of those goodies didn’t even exist back
in 1977, like our computers and cell phones. Our automobiles were clunkers that
maybe got 12 miles to the gallon and started to go belly up at 70,000 miles.
And don’t even get me started about the quality of healthcare. We all bitch and
moan about the cost of healthcare, much of which is government-generated, but
oh my, the quality of care is so vastly superior.

Personal example: My family has a history of tinnitus. Mine has
been getting steadily worse over the last 10 years, to the point that I have to
consider hearing aids. I sat down two days ago with my audiologist, who gave me
a loaner pair of hearing aids until the latest and greatest from Switzerland
show up in about four weeks. Those will connect to my iPhone and computer. I
kid you not. And when she began to explain the power of the microchips in those
little devices, I was totally blown away. The amount of real-time,
instantaneous analysis that these hearing aids can perform on the sounds around
you is truly stunning. They can change the output to your auditory nerve on the
fly, depending upon the acoustic characteristics of your situation.

Shane came home, and it was some time before she noticed that I
even had the hearing aids in. You can barely see them unless you’re looking.
Then we went to dinner at the local watering hole and sat outside, where I
admit it has been hard for me to carry on a conversation, and I was amazed at
everything that I could hear.

Or ask somebody about their latest knee or hip replacement. Or
whatever. Anybody who wants to go back to the good old days of 1977 is welcome
to them. Count me out.

Let me wrap up here. I am telling you that in the next 20 years
the amount of high-quality goods that are going to be supplied to the world is
going to drive the prices of almost everything down – except of course the cost
of government, which is only going to go up. Fact: The poverty level in the US
has been flat for almost 40 years, but spending on government poverty programs
is up 900%. Government has no incentive to be efficient. And in fact, as Jerry
Pournelle told us at the beginning of the letter:

In any bureaucracy, the people devoted to the benefit of the
bureaucracy itself always get in control, and those dedicated to the goals the
bureaucracy is supposed to accomplish have less and less influence, and
sometimes are eliminated entirely. [Pournelle's law of bureaucracy]

In any event, the ever-increasing amount of supply is going to be
massively deflationary over time and will offset the massive needs for
quantitative easing and debt relief, etc. We are going to do things in the next
20 years that simply defy our current imagination – mostly because we will be
forced into them in order to avoid utter disaster.

Let me close with this note to the wise. We are putting the
finishing touches on the next Strategic Investment Conference, to be held March
6–9 in San Diego. We are going to spend a great deal of time on these issues
that will be so utterly critical to us as we learn how to steer our portfolios
through future storms. You should look at your calendar and set aside those
dates. We will be accepting early-bird registrations within a few weeks. See
you there.

Boston, Chicago, Lisbon,
Denver, and Lugano

I want to first thank all my readers who have been generous with
their time and money in helping the victims of Hurricane Harvey. The toll is
staggering, with tens of thousands of homes totally destroyed and another
hundred thousand damaged and requiring repair that will take a long time to
complete. To put this disaster in perspective, if the Houston area were a
country, it would be the 17th largest by GDP in the world.

And now here comes Hurricane Irma. As I work on final edits while
flying to Boston, I meditate on the fact that Florida is even bigger than
Houston. I have been in contact with many friends who are planning to ride the
storm out in Florida, and I will admit I worry about them. And the entire
country will be faced with another large relief effort. Floridians will be in
our thoughts and prayers and hopefully benefit from our efforts and money in
the next few days.

Tomorrow I have to take a quick flight to Boston, where I will
spend a few days. But then I’ll be home until the end of the month, when I fly
up to Chicago for a couple days (Sept. 26–28) for a speech to the Wisconsin
Real Estate Alumni Association. Then I’m off the next day to Lisbon. I return
to Dallas to speak at the Dallas
Money Show on October 5–6. You can click on the link for details. I
will speak at an alternative investments conference in Denver on October 23–24
(details in future letters). I will again be in Denver on November 6 and 7,
speaking for the CFA Society and holding meetings. After a lot of small
back-and-forth flights in November, I’ll end up in Lugano, Switzerland, right
before Thanksgiving. Busy month!

And just for the record, I probably have about one third of The Age of Transformation
done or nearly so. I am not going to set an ETA for the final copy, because I
know the editing and rewriting process is going to be grueling and
time-consuming. There are going to be numerous copies out there for people to
read and provide comments on – either the total book or sections. I want this
one done right.

I was saddened to learn yesterday of the death of one of my
science-fiction heroes, Jerry Pournelle, who has given me so many hours of
reading pleasure over the last (at least) five decades and has contributed some
gems to this letter. Little-known fact: Back in 1985 he was kicked off of
ARPANET, the precursor to the Internet, because he had the temerity to write
about it in one of his columns. Those early intrepid Internet explorers from
MIT? They were all afraid that if Congress found out what they were doing, they
would shut the thing down as a boondoggle, as it was still being funded by
DARPA. The back-and-forth messaging is actually a
hilarious read, as viewed from 2017. But their brainchild was just another
one of those inventions that has radically shaped and improved supply. I doubt
anyone remembers those internet pioneers very much anymore, but in any case,
Jerry Pournelle’s stories will live on for a long time. May he rest in peace
(or stir up a bit of trouble where it needs stirring).

Time to hit the send button. Your assignment is to figure out how
to get to San Diego. As for me, I have to deal with my inbox. Have a great
week!

Your optimistic about humanity but concerned about government
analyst,

In normal circumstances, America’s Treasury bill market seems dull as ditchwater. This corner of government finance, after all, is supposed to be ultra safe; it is where stodgy asset managers park their cash.But these days, little seems entirely “normal” in the markets — at least not with Donald Trump in the White House. Earlier this week, the yield on four-week Treasury bills suddenly spiralled towards 1.3 per cent, a dramatic move not seen since 2008.This was sparked by fears that the Trump administration might fail to extend the American $19.8tn debt ceiling, potentially causing the US Treasury to run out of cash by early October. Indeed, anxiety was so high that Federated Investors, the fifth-largest money market fund in America, told the Financial Times that it was too nervous to buy T-bills that mature in the danger zone, even though it normally gobbles these up. But on Wednesday, the jitters were postponed after Mr Trump cut a surprise deal with Democrat leaders to extend that debt ceiling. T-bill yields duly tumbled by more than 17 basis points, leaving them back at levels seen a month ago.In some senses, this is good news. This week’s events have proven to investors, yet again, that Mr Trump’s bite is far weaker than his bark (or tweet). Never mind the fact that the president previously declared that the debt ceiling could only be raised if Congress funded his wall on the Mexican border. This, apparently, is now forgotten. But on another level, what happened this week is also deeply worrying. When debt ceiling crises erupted in 2011 and 2013, T-bills did not swing like this; indeed, the last time we saw this T-bill volatility was during the financial crisis. Thankfully, there is nothing like that occurring now. But this week’s event reveals a crucial point: today, as in 2008, the markets are grappling with the curse of living in an Alice-in-Wonderland world, a place where it is increasingly hard to price risk and uncertainty because the normal rules are being torn up.Think about it. Back in 2008, when the subprime crisis hit, investors’ assumptions about finance were turned upside down: “safe” banks collapsed; supposedly liquid markets froze up; highly rated instruments produced big losses. Then, in 2010, this sense of Alice in Wonderland spread to economics, as interest rates turned negative. Nobody knew where the limits lay. Now, an echo of this is occurring in politics. To be sure, parts of Washington still seem “normal”: many institutions remain strong; there are hard-headed people in the White House who are trying to promote economic reform and a steady foreign policy; the president says he is so determined to avoid debt default, that “always we’ll agree on [a] debt ceiling” increase — even if this means cutting deals with Democrats.But the president is also acting in ways that seem increasingly capricious, unpredictable and perverse. This week, after all, was supposed to be the president’s moment to champion tax reform. But he unexpectedly grabbed headlines by focusing on immigration. Last month the president was supposed to call a press conference to talk about infrastructure reform. But this was upset by Mr Trump’s comments on events in Charlottesville. Now Mr Trump’s team is asking Congress to prepare to pass a tax bill. But the president has also asked Congress to deliver an immigration bill in six months, potentially derailing everything else. Meanwhile the North Korea crisis is providing new distractions for Mr Trump, and investigations are intensifying into his dealings with Russia.That makes it desperately hard for investors to price the risks about what might happen when the debt ceiling deal ends on December 15; or indeed, to price the risks of Mr Trump’s presidency in a wider sense. The Ladbrokes betting site, for example, currently gives a 50 per cent chance of him being impeached, but also names him the favourite candidate to win the 2020 US election. Punters no longer know what to rule in — or out. Given this, it no surprise that T-bill yields swung wildly this week; nor that many asset managers are quietly hedging their portfolios; or that some business leaders who worked with the White House earlier this year are now trying to protect their reputations by criticising the president on immigration. Markets might seem outwardly calm, but uncertainty — and fragility — is building. Those none-too-boring T-bills are a canary in the Washington coal mine.

Turkish President Recep Tayyip Erdogan

With the Turkish president firing away at Germany at will, Foreign Minister Sigmar Gabriel recently announced that Berlin would take a tougher stance. It hasn't happened. Indeed, Germany may soon have to cough up significant amounts of money for Ankara.

When German Foreign Minister Sigmar Gabriel and Angela Merkel met at the end of July to discuss how to handle the most recent indignities fired off by Turkish President Recep Tayyip Erdogan in the direction of Germany, the chancellor gave the impression that she completely supported Gabriel's proposals. Speaking on television afterwards, Gabriel said "everything I am telling you has been coordinated with Ms. Merkel."One month later, though, things look markedly different. It is apparently more difficult than he thought to follow up tough words with deeds. And consensus in Merkel's cabinet has also suffered. Gabriel was able to achieve a quick success by convincing Erdogan to withdraw a list of terrorism supporters which included German companies. Not long later, though, the Turkish president sharpened his tone once again, launching a personal attack on the German foreign minister: "Who are you to speak to the president of Turkey?" he hissed at Gabriel. The number of refugees arriving on the Greek islands has also been on the rise of late, a situation that Berlin and Brussels are monitoring with concern.

As such, Gabriel's appetite has only grown for taking the kind of tough stance on Turkey that Germany had threatened. But the Foreign Ministry in Berlin has lately found itself confronted with reservations and opposition in both Brussels and Berlin.When it comes to Gabriel's demand to review state export credit guarantees for deals with Turkey, the chancellor herself has intervened. Gabriel would like to introduce a cap on the total sum of such guarantees (known as Hermes Cover), but the Chancellery is skeptical. Merkel is concerned that such a move could hurt German exporters and she isn't interested in damaging relations with that constituency in the middle of her re-election campaign - particularly out of fear that she could lose votes to the business-friendly Free Democrats (FDP). The consequence is that negotiations between the Foreign Ministry and the Chancellery on the issue are making no progress.

Trying for Weeks

A second threat aimed at hurting Erdogan has met a similar fate. With agreement from the Chancellery, Gabriel wrote to the EU's foreign policy chief, Federica Mogherini, and to Enlargement Commissioner Johannes Hahn to inquire whether pre-accession assistance, being paid to Ankara as part of ongoing accession negotiations, could be suspended. Between 2014 and 2020, Turkey is set to receive 4.45 billion euros in accordance with the Instrument for Pre-Accession Assistance II (IPA II) program. Thus far, only around 250 million euros has been dispersed.Internally, Commission officials have been trying for weeks to make it clear to their German counterparts that suspending the payments is far from straightforward. Indeed, Brussels doesn't even have the power to make such a decision. The responsibility lies with EU member states, a qualified majority of whom would have to agree that Turkey is no longer in fulfillment of the so-called Copenhagen accession criteria on, for example, human rights or rule of law issues. That, though, is risky, since that would force a suspension of the accession talks - at least according to the Commission's interpretation. Berlin, though, doesn't agree.Only minor adjustments are possible. Hahn's office, for example, has long been looking for ways to prevent EU money from aiding the purges that Erdogan launched after last summer's unsuccessful coup attempt. Smaller projects, such as one to train judges in Turkey, have been stopped since its goal can hardly be achieved at a time when the Turkish president is throwing independent lawyers in jail.

Vehemently Opposed

The mid-term review of pre-accession aid for all EU accession candidates (including countries like Albania and Serbia in addition to Turkey) could represent a greater danger to Erdogan. Should Turkey get poor marks on issues such as the rule of law, up to 20 percent of the money earmarked for the country could be sent elsewhere. Again, though, EU member states must grant their approval.And that, as the German government has realized, is not a foregone conclusion. After surveying their 27 EU partners, Berlin found that only a minority are in favor of its course. France and Italy are among those most vehemently opposed. Plus, the EU is in the process of trying to drum up more money for Turkey as it is. At issue is the second tranche of the 6 billion euros Turkey was promised as part of the refugee deal. The deal calls for the entire sum to be paid by the end of 2018 and is earmarked for such projects as the provision of humane shelters for refugees. The first tranche of 3 billion euros will have been used up by the end of the year and Budget Commissioner Günther Oettinger has included around 300 million euros for the second tranche in his 2018 draft budget. The rest, though, is to come from EU member states. "The member states have to finance 2 billion plus X," he says. Germany contributed around 500 million euros to the first tranche, but will likely have to pay more this time around - both because the Commission itself has less money available and because it isn't clear whether Britain will continue to contribute its share.There is even opposition within Gabriel's Social Democratic Party (SPD) to cutting Turkey's pre-accession assistance. Jens Geier, head of the German SPD caucus in European Parliament, says: "A portion of our funding serves to strengthen civil society. As such, it often helps those who stand up to Erdogan."

BEIJING – On August 11, 2015, the People’s Bank of China (PBOC) established that the central parity of the renminbi’s exchange rate against the US dollar would be set with reference to the previous trading day’s closing price, within a 2% band. It was a bold step toward a more flexible, market-driven exchange rate. But the announcement of the reform caused the market to panic, triggering a 3% decline in the renminbi in just four trading days. So it was quickly abandoned.

That policy reversal, while understandable, is regrettable. For the rest of 2015, the PBOC struggled to prevent the renminbi from weakening. Having spent a huge amount of foreign-exchange reserves, it decided in February 2016 to introduce a new rule for setting the central parity rate.

According to the replacement rule, the central parity rate would take into account not just the previous trading day’s closing price, but also the “theoretical exchange rate” that would keep the index of the China Foreign Exchange Trade System, a 24-currency basket, unchanged over the previous 24 hours. In other words, whenever there was a change in the US dollar index, the PBOC would have to intervene in the foreign-exchange market to align the market-determined renminbi-dollar exchange rate with the theoretical exchange rate that kept the CFETS index stable.

According to the PBOC, with an uncertain dollar index, the introduction of a basket of currencies into the price-setting process was needed to enable two-way fluctuations of the renminbi-dollar exchange rate. The market was allowed to verify whether the PBOC had followed the rate-setting rule, but it didn’t determine the exchange rate; that task was carried out by the PBOC.

In any case, when the dollar index is rising, the new rule seemed to work just fine. Given persistent downward pressure on the exchange rate, if the PBOC allowed the renminbi to fall against the rising dollar index, the CFETS index would stay more or less constant. This meant that the PBOC could follow the rate-setting rule without resorting to intervention too often.

But, all else being equal, if the dollar index was falling, the PBOC would have to set a higher central parity rate for the renminbi. This implies that the PBOC could be forced to sell its US dollar reserves, already substantially depleted, to push up artificially the closing price of the renminbi and keep the spot rate within the 2% band.

In July 2017, the PBOC decided to make an additional change to the rate-setting rule to correct for “big market swings” and “irrational herd behavior.” By introducing a so-called “countercyclical factor” to the rate-setting equation, the PBOC attempted to temper the disproportionate impact of depreciation expectations, relative to improvements in the Chinese economy’s fundamentals, on the exchange rate.

The logic is debatable. But the real problem with the change is that no one outside the PBOC knows how the countercyclical factor is quantified, much less how it is weighted against the previous day’s closing price or the theoretical exchange rate. As a result, the market does not merely have a substantially reduced role in setting the exchange rate; it can’t even check whether the PBOC is following its rate-setting rule for the central parity. This means that the monetary authorities have even more discretion than they had before.

The August 2015 reforms were rightly aimed at making China’s exchange-rate system more transparent, market-driven, and flexible. With the new rule, the PBOC effectively backpedaled.

And it didn’t have to: with the benefit of hindsight, it seems reasonable to assume that, had the PBOC simply been more patient, it could have stuck with the August 2015 reform. Within a few weeks or even days, calm probably would have returned to the market, and the PBOC would have made important progress.

In recent months, the Chinese economy has shown credible signs of stabilization; capital outflows have ebbed, at least for the time being; and the financial market has remained much calmer than in 2015. In this more favorable context, the PBOC, rather than churning out unnecessarily complicated new rate-setting rules, needs to return to reform.

This time last year, Turkey was in the throes of a crisis. A faction of the military had tried to – and nearly did – overthrow the government. The putsch failed, and President Recep Tayyip Erdogan took the opportunity to purge the system of current and potential opponents to his rule. The purges haven’t stopped, and Turkey is still in a formal state of emergency, but the worst of the crisis has passed and Turkey is beginning to stabilize.

Now, the chaos isn’t in Turkey but around it. And one of the surest signs that Turkey is nearly back on its feet is the way it is confronting the chaos.

Ankara’s Perspective

Consider for a moment the world from Ankara’s perspective. To the south, the Islamic State is slowly being crushed. In Iraq, it’s barely hanging on to its last strongholds; in Syria, it is under assault from the U.S.-backed Syrian Democratic Forces and the Russian-backed Assad regime. Turkey wants to see IS defeated, but it isn’t a fan of who is doing it: The SDF is made up of Syrian Kurds, who, to Turkey, are just as much a terrorist group as IS, and Turkey was an enemy of the Assad regime long before the Syrian civil war began. To the southeast, the Kurdistan Regional Government – an autonomous Kurdish region in northern Iraq – appears determined to go forward with an independence referendum on Sept. 25. Turkey has already told the KRG to cancel the referendum because it fears what a vote for independence would mean for the millions of Kurds who live in or on the border with Turkey.

Farther south, Iran and Saudi Arabia are flirting one minute and threatening each other the next. Turkey is getting in on the action, broaching the possibility of limited cooperation with Iran in some areas of mutual interest. Meanwhile, to the north, Turkish relations with Russia remain complicated and inextricably linked to the U.S.-Russia relationship. Russia and the U.S. are quietly cooperating in Syria in the fight against IS, but they are at loggerheads everywhere else. Across the Black Sea from Turkey in Ukraine, the U.S. is backing Russia into a corner, and two places we expect Russia to respond are the Balkans and the Caucasus. Turkey hopes to expand its influence into the former and is already a major player in the latter. Russian activity in either of these regions would affect Turkey, and the Turks must be ready for that.

Turkey’s response to these challenges is one that has become typical of Turkish foreign policy: It is trying to balance between all the various parties without solidly committing itself to any. The number of high-profile visits Turkey has hosted in recent weeks is telling. Last week, Iran’s chairman of the armed forces General Staff was in Ankara for talks. Earlier this week, Russia’s armed forces chief of staff also visited Turkey to discuss coordinating efforts in Syria. Then on Aug. 23, U.S. Secretary of Defense James Mattis arrived in Turkey for a marathon day of meetings with Turkish officials.

People chant slogans and wave flags in Istanbul on July 15, 2017, as they wait for official ceremonies to begin on the July 15 Martyrs Bridge on the anniversary of the failed coup attempt. CHRIS MCGRATH/Getty Images

With Iran, Turkey promised to boost military cooperation – something of a surprise considering that Turkey and Iran both aspire to regional leadership in the long term. Their interests are, ultimately, mutually exclusive. With Russia, Turkey agreed to tactical coordination in Syria and saluted Moscow’s understanding of Turkey’s concerns about the dangers posed by Syrian Kurds. As with Iran, however, Turkey has fundamental strategic differences with Russia in the short term (the future of Syria and Assad’s place in it) and the long term (competition in the Caucasus and southeastern Europe). There are tactical ways in which these powers can help each other – Iran and Turkey against the Kurds, Russia and Turkey against U.S. influence in the region – but these are not long-term alliances.

Then there is the U.S., with which Turkish relations have been deteriorating for years. The U.S. decision to begin arming Syrian Kurds in May was another blow to relations, and Mattis’ visit appears to have been in large measure to patch up the issue. The official statements out of the Pentagon are typical of political statements: sweet sounding with no substance. But unnamed Turkish officials have been telling any reporter who will listen about how Mattis pledged to help Turkey fight the Kurdish PKK militant group and how American support for Syrian Kurds is limited to the duration of the fight against the Islamic State. That Mattis came out publicly against the KRG’s independence referendum probably didn’t hurt either. For the moment, Turkey seems more publicly comfortable than it has been with the U.S. in months, so whatever Mattis promised in Ankara had the desired effect.

Between Superpowers

It’s the balance between Russia and the U.S. that is particularly difficult for Turkey to strike right now. In the coming years, Turkey’s imperatives will compel it to encroach on areas that Russia considers within its sphere of influence. Turkey isn’t ready for that conflict, and in the interim, Russia is a crucial player in the Caucasus and a powerful one in the Middle East.

Turkey’s imperatives jibe better with the U.S. vision for the region, but it isn’t a perfect marriage. The U.S. seeks a balance of power in the region and wants Turkey as a junior ally; Turkey sees itself as a rising power that doesn’t have to do anyone’s bidding, even if the one asking is the mighty United States. Turkey isn’t strong enough to push back against both, and kowtowing to one does nothing to advance Turkish interests either, hence its complicated relationship with both.

As if to underline the complexity of the game Turkey is playing, Mattis’ next stop after leaving Ankara was Kiev. Both Ukrainian and Russian media sources quoted Mattis as saying the U.S. had approved the delivery of $175 million worth of “special equipment that will strengthen the defense capability of Ukraine.” U.S. media’s reporting on the issue omitted this particular detail, but even so, there can be no doubt about the tone of Mattis’ meeting with Ukraine’s president and his comments afterward. The defense secretary decried Russian aggression and vowed that the U.S. would not tolerate Russian violation of Ukrainian sovereignty.

Mattis stopped short of throwing down the gauntlet: The U.S. is still debating whether to supply Ukraine with defensive weapons such as anti-tank missiles. Doing so would cross a serious line from Russia’s perspective. And there have been hints that the U.S.is at least open to dialogue: An upcoming meeting between the U.S. special envoy to Ukraine and one of Russian President Vladimir Putin’s presidential aides could be a step toward defusing the situation. But between Mattis’ strong language and recent U.S. sanctions against Russia, U.S.-Russia relations outside of Syria are trending toward distrust and hostility. Russia can absorb only so many challenges from the U.S. before the Kremlin will need to demonstrate that it is strong enough to prevent the U.S. from pushing it around.

Articulating a Vision

All these issues matter to Turkey, and now the Turks are trying to formulate a coherent plan to pursue their interests that doesn’t outstrip their capabilities. For all of Turkey’s threats to intervene in Syria or to attack various Kurdish groups, it has stayed out of the fray. Turkey’s foreign minister even ruled out closing the border with the KRG if it goes through with its independence referendum. Turkey’s primary goal is to demonize the Syrian Kurds, who have more in common with Turkey’s Kurds than they do with most of Iraq’s Kurds, and to leverage the support it can offer to Russia and the U.S. to align the policies of both with Turkey’s immediate concerns.

The coup attempt weakened Turkey briefly, especially its ability to project hard power. But it also gave Erdogan a chance to clear the deck and pursue grander ambitions. Now, after a year of recuperation, Turkey is hosting the top defense leaders of the U.S., Russia and Iran, all in the course of a week and a half. Not only that, but those representatives are all coming to Turkey, and Turkey is setting the price for its help without committing itself to any agenda except its own immediate ones: to keep its national integrity intact, to rebuild its military and economy, and to let everyone else weaken themselves by fighting each other.

Turkey wants to stay in the eye of the storm as long as it can, but ultimately, Turkey can’t control everything that happens around it. All it can do is make itself strong enough and shape its regional environment enough so that when it does have to step out into the storm, it can protect its interests. The most important thing after this week is not just that Turkey is articulating that vision, but that it is forgoing opportunistic relationships to see that its vision comes to pass.

The United States can’t win this war. It’s time to surrender.After all, this war has already claimed thousands of lives. It’s leveled entire communities. And it’s wasted more than $1 trillion worth of taxpayer dollars.I’m not talking about the War in Afghanistan, the Iraq War, or even the War on Terror.I’m talking about the War on Drugs.As you probably know, Richard Nixon declared a war on drugs in 1971. But like most wars, the U.S. should have never entered this conflict.After all, prohibition didn’t work with alcohol. Why would it work with drugs?Needless to say, it’s been a massive failure.The good news is that this bloody and costly war may soon end.In November, five U.S. states voted to legalize marijuana outright. As a result, 29 states and Washington D.C. now allow you to use marijuana either recreationally or for medical purposes.It’s now only a matter of time before the rest of the country follows suit…After all, 60% of Americans already think that the federal government should legalize marijuana outright. That’s up from 25% in 1995.And more than 90% of respondents in a recent study by Quinnipiac University think medical marijuana should be legal at the national level.In other words, most people no longer see marijuana as a street drug. They see it as a plant that can help people.I’m telling you this because there’s big money to be made in marijuana…Today, I’ll show you how to profit from this emerging industry.But don’t worry. You won’t have to stand on a street corner or deal with shady characters. Instead, you can now buy marijuana stocks right from the comfort of your own home.Before I continue, I have to be clear about something.Marijuana stocks aren’t for everyone…A lot of people wouldn’t buy a marijuana stock even if it could make them 10x their money.And that’s fine.You should only buy the stocks that are right for you.So, if you wouldn’t touch marijuana stocks with a 10-foot pole, no problema.But if marijuana stocks do sound like something you might buy, read on. I’m about to show you how to potentially make a fortune off marijuana. Here’s why…The marijuana business is booming…It’s already a $7 billion market.By 2020, Bank of America and Merrill Lynch say it could be a $35 billion market.Investment bank the Cowen Group projects that the market will be worth $50 billion a decade from now.Some analysts think the industry could eventually generate as much as $200 billion in sales every year.In short, the marijuana industry is getting ready to explode.Soon, marijuana stocks will be the talk of the investing world. But you shouldn’t wait until Jim Cramer is screaming about them to buy them.Instead, you should get in front of the crowd…before the frenzy begins.Money is already pouring into marijuana stocks…Just look at how the Marijuana Index has done over the past year.This index, which tracks the performance of 32 North American marijuana stocks, is up more than 80% since last April.Canadian marijuana stocks have done even better.That’s a huge move for such a short period of time. But remember, the marijuana industry is about to get a whole lot bigger.In other words, there’s still a lot of money to be made in marijuana stocks.By now, you’re probably itching to buy marijuana stocks…But you have to understand something critical.You shouldn’t touch most marijuana stocks.That’s because most of these companies don’t trade on major exchanges. They trade over the counter.They’re “penny stocks.”This is a huge deal.You see, penny stocks aren’t subject to the same financial reporting regulations as companies that trade on major exchanges.This makes it harder to analyze them. It also makes it easier for companies to commit fraud.Consider the marijuana vending machine company MedBox. Five years ago, MedBox was one of the hottest companies in the marijuana industry.Its share price soared from $2.75 to $205 from October 2012 to November 2012. That’s a staggering gain for such a short period.Investors piled into the stock because they were excited about the company’s growth potential. There was just one problem.The company’s rapid growth wasn’t real. You see, the founder of MedBox created a shell company and used illegal stock sales to boost reported revenues. The SEC eventually discovered that the company had made up 90% of its sales.MedBox was a giant scam. When investors learned this, the company’s share price plummeted. Its stock now trades near zero.In short, you need to be very careful about which marijuana stocks you buy…Stay tuned. We’ll have more on this soon.

Apple’s market value has surged in anticipation of a strong cycle, which makes further upside more challenging

By Dan Gallagher .

A customer at an Apple Store in Chicago compared her iPhone 6, left, with a jet black iPhone 7 in September 2016. The company is expected to unveil its latest iteration of the iPhone on Tuesday. Photo: Kiichiro Sato/Associated Press

Only Apple Inc. AAPL -1.63%▲ gets to decide what to charge for its new iPhone, but investors will get to decide what the new flagship is worth. That could be a trillion-dollar question.The market value of the world’s most valuable company already has surged 35% this year, to around $820 billion, ahead of Apple’s expected introduction of the new iPhones on Tuesday. That means the stock needs to gain another 22%—to about $193.70—to get Apple’s market value to the $1 trillion mark. And, while its heavy dependence on the iPhone has made Apple’s stock rather cyclical over the last five years, the price tends to go up instead of down in the immediate months that follow a new launch of new devices.The comparison that most readily springs to mind is the iPhone 6. Apple’s stock price had jumped nearly 30% over the previous six months by the time that version was introduced on Sept. 9, 2014. A larger screen kicked off a strong upgrade cycle that drove iPhone unit sales up 37% for the subsequent fiscal year and the stock up another 30% over the next six months.But there are no guarantees of a repeat performance this time around. Apple is expected to introduce three new phones at an event on Tuesday. Two are believed to be incremental updates to the current iPhone 7 line, while another is expected to be a redesigned phone with a curved, edge-to-edge display similar to this year’s Galaxy lineup from Samsung . Production issues with the new design could push the launch of that model later into the year.Apple also is expected to charge a much higher price for the new phone—possibly $1,000 or higher. That would help offset soaring prices for key components such as memory and displays. It also could crimp demand if consumers find the price too rich.Clarity on those points from Tuesday’s presentation will help investors better assess the new phone’s potential. Analysts already expect the bulk of the new iPhone cycle to show up in Apple’s results for the next fiscal year, which begins in October. Total revenue is expected to hit a record $261 billion in fiscal 2018, with a 13% jump in iPhone unit sales expected. Apple’s per-share earnings for the year are expected to be $10.82—20% higher than Wall Street’s forecast for the current fiscal year.Apple’s stock currently trades about 14.7 times 2018’s projected earnings, which is already on the high side of its 5-year range. A market cap of $1 trillion would represent nearly 18 times forward earnings based on current estimates, which is well above the stock’s peak multiple. Apple remains the cheapest of its Big Tech peers—especially when accounting for its $165 billion of net cash—so a strong iPhone cycle could give the stock some additional upside. But investors should be aware that much has already been dialed in.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.